Report
Vallco Special Area Real Estate Market Assessment
Prepared for:
City of Cupertino
Prepared by:
Economic & Planning Systems, Inc.
May 14, 2018
EPS #171128
Table of Contents
1. INTRODUCTION AND KEY FINDINGS ...... 1
2. SOCIOECONOMIC CONTEXT ...... 5
Population ...... 5 Employment ...... 6
3. RETAIL REAL ESTATE MARKET CONDITIONS ...... 12
Market Trends ...... 12 Pipeline Projects ...... 15 Retail Conclusion ...... 16 Project Profiles ...... 17
4. OFFICE REAL ESTATE MARKET CONDITIONS ...... 22
Market Trends ...... 22 Pipeline Projects ...... 25 Office Conclusion ...... 25 Project Profiles ...... 26
5. RESIDENTIAL REAL ESTATE MARKET CONDITIONS ...... 29
Residential Permitting ...... 29 Market Trends ...... 31 Pipeline Projects ...... 34 Residential Conclusion ...... 35 Project Profiles ...... 36
6. HOTEL MARKET CONDITIONS ...... 40
Hotel Conclusion ...... 40 Project Profiles ...... 43
List of Figures
Figure 1 Site Location Relative to Highways and Freeways ...... 1
Figure 2 Cupertino Employment Trend ...... 9
Figure 3 Employment Sector Trends in Santa Clara County ...... 10
Figure 4 Average Retail Rental Rate per Square Foot in Cupertino and Santa Clara County ... 13
Figure 5 Retail Market Performance in Cupertino ...... 13
Figure 6 Retail Market Performance in Santa Clara County ...... 14
Figure 7 Taxable Retail Sales in Cupertino ...... 15
Figure 8 Office Lease Rates in Cupertino and Santa Clara County ...... 23
Figure 9 Office Market Performance in Cupertino ...... 24
Figure 10 Office Market Performance in Santa Clara County ...... 24
Figure 11 Residential Building Permits in Cupertino ...... 30
Figure 12 Residential Building Permits in Santa Clara County ...... 30
Figure 13 Total Residential Building Permits in Selected Jurisdictions ...... 31
Figure 14 Average Multifamily Rental Rate per Square Foot in Cupertino and Santa Clara County ...... 32
Figure 15 Multifamily Market Performance in Cupertino ...... 32
Figure 16 Multifamily Market Performance in Santa Clara County ...... 33
Figure 17 Value of Condominium (For-Sale) Units in Cupertino ...... 34
Figure 18 Cupertino Hotels ...... 41
List of Tables
Table 1 Santa Clara County Historical Population Growth Trends ...... 7
Table 2 Santa Clara County Jobs-to-Working Residents Ratios ...... 8
Table 3 Cupertino Commute Patterns ...... 9
Table 4 Santa Clara County Employment Trends by Industry ...... 11
Table 5 Santa Clara County Pipeline Retail Development ...... 16
Table 6 Santa Clara County Pipeline Office Development ...... 25
Table 7 Santa Clara County Pipeline Multifamily Development ...... 35
Table 8 Hotel Inventory in Cupertino...... 41
Table 9 Cupertino Hotel Performance (2017) ...... 42
1. INTRODUCTION AND KEY FINDINGS
The 58-acre Vallco Special Area (Site) is home to the 1970s-era Vallco Shopping Mall, located off of Interstate 280 in the City of Cupertino, as shown in Figure 1. The Mall’s decline was reaffirmed with the closure of its anchor tenants including Macy’s, Sears, and J.C. Penney during 2015 and 2016. As of early 2018, the 1.2 million-square foot Vallco Mall was about 85 percent vacant, with AMC Theatres, Cupertino Ice Center, Bowlmor Lanes, Cold Stone Creamery, Dynasty Seafood Restaurant, and Benihana remaining as tenants.1 As part of an effort to revitalize the Vallco Special Area (Site), the City is working to develop a Specific Plan, along with an Environmental Impact Report (EIR) that evaluates possible alternative reuses.
Figure 1 Site Location Relative to Highways and Freeways
Source: ArcGIS Online; Economic & Planning Systems, Inc.
The City of Cupertino retained Economic & Planning System (EPS), as part of a larger consultant team (Team), to assist with the preparation of a Specific Plan for the Site. This initial assessment of market conditions and reuse opportunities seeks to provide essential, foundational local and regional market information to inform land use options. This report focuses on four primary land use types which EPS agreed upon with City staff, including office, retail, residential, and hotel uses. As part of this market assessment, EPS has considered socioeconomic and real estate market trends as well as detailed information concerning new, high-performing local and regional projects, including their market positioning, architectural format, amenity offerings, and market
1 AMC Cupertino Square 16 closed during March, after data collection for this report had concluded.
Economic & Planning Systems, Inc. 1 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
value. In subsequent tasks, EPS will coordinate with City staff and the Team to prepare detailed development options for the Site and to evaluate the financial viability of those alternatives.
Key Findings
1. Cupertino’s economic performance and competitive market position is strong, primarily fueled by the dominant high-tech sector of Silicon Valley. Between 2006 and 2015, Cupertino experienced a 46.3 percent increase in jobs, largely driven by growth in the technology-driven sectors. In contrast, population growth in Cupertino over the last decade has lagged behind employment growth, and has been modest compared to growth rates of neighboring cities and Santa Clara County overall. While job growth has benefitted some residents, over 90 percent of Cupertino jobs are held by nonresidents. Despite the growth imbalance, the City’s jobs-to-resident ratio remains below some of the most employment rich jurisdictions in the County. The region’s strong economic climate has positioned Cupertino as a highly attractive location for development, with strong market performance across residential, office, and hotel land uses. Retail development potential is more limited, largely owing to national shopping trends that are negatively affecting brick-and-mortar retailers. Nonetheless, excluding Vallco from the market data reveals that retail vacancy in Cupertino is a very low 2 percent Citywide and there likely are strategic opportunities for new retail development.
2. The location of the Vallco Site is likely to successfully capture demand for office and housing but being between nearby, well-established “super-regional malls” and “lifestyle centers” limits the potential for a significant retail project. The growing high-tech sector in the South Bay has catalyzed significant demand for housing and office space, evidenced by Countywide real estate development and market price escalation. Demand for these land uses likely would be strong at the Site, given its convenient freeway access and central location in Silicon Valley. While the Site location also is appropriate for retail, the competitive landscape for retailing at Vallco has become more challenging over time as major super- regional malls and lifestyle Source: CoStar Group; ArcGIS Online; Economic & Planning Systems, Inc. centers now serve this
Economic & Planning Systems, Inc. 2 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
trade area. These centers include Westfield Valley Fair and Santana Row in San Jose, the Stanford Shopping Center in Palo Alto, and the Great Mall in Milpitas, all of which are located within a 20-minute drive of Cupertino.
3. The closure of retail anchors at the Vallco Site reflect broader national trends affecting retail, with traditional mall stores and indoor retail formats needing to evolve to meet current consumer preferences for experiences and services. Retail reuse of the Site would require unique positioning that complements rather than competes with regional and local retailers. After the 2008 recession, consumers altered their spending habits. Shifting spending patterns and competition from online retail have resulted in a sustained demand for luxury and value-oriented retail real estate, with internet purchases now capturing a significant share of mid-market retail sales. In general, successful malls have evolved tenant mixes and formats to cater to luxury or value consumers. Regional examples of luxury lifestyle centers include Santana Row and the Stanford Shopping Center. At struggling retail centers, mall managers go to great lengths to sustain high occupancy rates and may discount lease rates in order to avoid losing anchor tenants. When this tactic is no longer effective, malls are often pushed to close or renovate and reposition in the market, often adding a mix of new uses. Despite the well-publicized retail store closures, some retail businesses with unique market positioning and customer service offerings continue to outcompete and expand. Successful, growing retailers often are seeking to locate in high-barrier-to-entry markets with strong consumer demographics, such as in Cupertino. Examples of new development, including Sunnyvale Town Center and Santa Clara Square, indicate potential for mixed-use development with a retail component. There has been limited retail development in Cupertino over the last decade. The Main Street project, the City’s most significant retail addition in recent years, comprises about 130,000 square feet of retail space. While the project is near full occupancy, at least one restaurant has closed, an indication of the challenges face new retail and restaurant uses. Currently, there is an additional 14,500 square feet of retail space in the City’s development pipeline. These figures are dwarfed by the 1.2 million square feet of retail within Vallco. Accordingly, while full-fledged reuse of Vallco as a shopping center appears highly unlikely, significant opportunities for retail likely exist along with growth in the City and additional mixed-use development in the Vallco Special Area.
4. Although the City historically has supported single-family and lower density multifamily developments, the recent construction of the Apple Campus II and ongoing economic expansion in Silicon Valley have intensified demand for housing. With an insufficient supply of available residential inventory and resulting price escalation, housing affordability challenges in Silicon Valley continue to amplify. While residential permitting data reveal a historical bias toward single-family housing development in Cupertino, both County and City data reveal a significant rise in multifamily permitting since 2009, indicating a shift towards more compact and affordable housing options. Despite this new housing, residential development in Cupertino has lagged relative to the economic expansion. Clearly, the strong demand for housing in the South Bay and desirable Vallco location suggest great potential for housing at the Site, with demand across the full spectrum of affordability.
Economic & Planning Systems, Inc. 3 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Over the last eleven years, the City has issued 870 residential unit permits, accounting for just over 1 percent of the County total. Of these units, the City has delivered 200 units in multifamily projects, with another 135 units aimed to be completed in early 2018. With limited supply growth, multifamily lease rates are relatively strong in Cupertino. With new multifamily housing generating rents approaching $4.00 per square foot per month, the market likely can support denser housing formats, although new multifamily projects in the City have been limited to five stories.
5. While the City of Cupertino has permitted few office developments in recent years, robust local regional economic performance suggests significantly greater development potential. Strong regional economic indicators and associated market demand for office space in core Silicon Valley locations have spurred significant new office development in Silicon Valley. However, Cupertino has purposely limited new office development in recent years, with the notable exception of the recently opened 2.8-million-square foot Apple Campus II. Due to growth control measures in Cupertino (i.e., General Plan Amendments required for new office development), market performance does not fully reveal the potential for new development. Today, the City has no office projects in the pipeline, office vacancy is only 2 percent, and lease rates are above the County average. In Santa Clara County overall, over the past decade office stock grew by 23 million square feet, and meanwhile vacancy rates fell from 2009 highs of 17 percent to current rates of roughly 10 percent (February 2018). Even after seven consecutive years of positive net absorption, investor demand remains strong for office space that is well-designed and strategically located. Despite mounting concerns about oversupply (roughly 22 million square feet of office is in the pipeline countywide 2) the Vallco location on I-280 and proximity to Apple’s global headquarters suggest significant potential for office development at the Site.
6. Along with the growing Silicon Valley economy, demand for lodging in Cupertino also will grow to meet the needs of business travelers. Cupertino’s hotel market has seen markedly high occupancy rates and strong room rates in recent years. The City’s hotels primarily cater to business travelers, with weekday occupancy rates regularly reaching 90 percent and demand remaining fairly consistent year-round. Hotel demand may be satisfied in the near term, given the 2013 opening of the Aloft Hotel, the 2017 opening of the Residence Inn, the Hyatt House currently under construction, and two additional proposed hotels in the City. However, there likely will be additional opportunities for well-positioned hotels to satisfy future visitor needs over the longer term.
2 Includes projects currently Proposed and Under Construction in Santa Clara County, as reported by CoStar Group.
Economic & Planning Systems, Inc. 4 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx
2. SOCIOECONOMIC CONTEXT
Cupertino is a city of roughly 60,000 residents located in Santa Clara County, directly west of San Jose, at the insersection of Highway 85 and Interstate 280. The City is at the core of Silicon Valley, with numerous technology companies located in the vicinity. Cupertino has become well- known as the headquarters location of Apple, Inc., the City’s largest employer. Apple has had a growing presence in Cupertino, particularly owing to the Apple’s multibillion dollar headquarters, Apple Campus II, completed in 2017. In addition to its importance to the Silicon Valley economy, Cupertino has a good reputation as a residential location, largely due to its high-performing schools and well-cared for residential communities. Furthermore, DeAnza Community College is one of the City’s largest public sector employers, as well as one of the largest community colleges in the United States, attracting local and international students.
Source: ArcGIS Online; Economic & Planning Systems, Inc.
Population
Over the last decade, the City has seen modest population growth averaging just 0.6 percent per year, which is well below that of neighboring jurisdictions. While the City experienced growth of roughly 1 percent average annual growth in the period from 2007 to 2012, there was a significant slowdown from 2012 to 2017. During this period, Cupertino had average annual growth of just 0.07 percent, as compared to the average for the County’s cities of 1.1 percent. In
Economic & Planning Systems, Inc. 5 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
fact, Cupertino experienced the lowest growth rate of all Santa Clara cities over the last five years (2012 to 2017). Table 1 presents population trends in Santa Clara County from 2007 through 2017.
Employment
Cupertino has evolved with the rise of Silicon Valley and the influx of businesses. With regard to the composition of employment, the City’s economy continues to be fueled by science and technology-related businesses. In addition to being home to Apple headquarters, Cupertino is the corporate headquarters of CRC Health, DURECT, Mirapath, Seagate Technology, and others. As of 2015, the City was home to approximately 40,000 jobs and a relatively healthy jobs-to- working residents ratio of 1.59, as seen in Table 2.
Employment in Cupertino increased 46.3 percent from 2006 to 2015, as shown in Figure 2. While the City does not have a CalTrain stop, it does have easy freeway access, allowing for regional commuting. Cupertino is well-integrated into the regional economy with 93 percent of the City’s employees commuting from outside the City. Table 3 presents commuting trends for Cupertino.
The dominant industry in Santa Clara County is Manufacturing, followed Professional, Scientific, and Technical Services, with jobs in those sectors accounting for 15.9 percent and 14.5 percent of total jobs, respectively. The County’s other dominant industries include Health Care and Social Assistance, Information, and Accommodations and Food Services, as seen in Figure 3 Source: ArcGIS Online; Economic & Planning Systems, Inc. and Table 4.
Over the last decade, the County has seen relatively modest job growth, which is largely attributable to the significant loss of jobs resulting from the 2008 recession. From 2006 to 2011, Santa Clara County saw a loss in the total number of jobs, while the next five-year period, from 2011 to 2016, saw a 3 percent increase in total jobs, as detailed in Table 4.
Economic & Planning Systems, Inc. 6 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Table 1 Santa Clara County Historical Population Growth Trends
Change 2007-2012 Change 2012-2017 Change 2007-2017 Annual Annual Annual Place / Item 2007 2012 2017 Change Growth Change Growth Change Growth Rate Rate Rate
Cupertino 55,611 58,714 58,917 3,103 1.1% 203 0.1% 3,306 0.6%
Campbell 38,382 40,050 42,726 1,668 0.9% 2,676 1.3% 4,344 1.1% Gilroy 47,047 50,695 55,936 3,648 1.5% 5,241 2.0% 8,889 1.7% Los Altos 27,831 29,696 31,402 1,865 1.3% 1,706 1.1% 3,571 1.2% Los Altos Hills 7,772 8,127 8,634 355 0.9% 507 1.2% 862 1.1% Los Gatos 28,177 30,142 31,314 1,965 1.4% 1,172 0.8% 3,137 1.1% Milpitas 62,684 67,613 75,410 4,929 1.5% 7,797 2.2% 12,726 1.9% Monte Sereno 3,314 3,383 3,501 69 0.4% 118 0.7% 187 0.6% Morgan Hill 36,467 39,426 44,145 2,959 1.6% 4,719 2.3% 7,678 1.9% Mountain View 71,410 75,188 79,278 3,778 1.0% 4,090 1.1% 7,868 1.1% Palo Alto 61,385 65,882 68,691 4,497 1.4% 2,809 0.8% 7,306 1.1% San Jose 913,310 980,347 1,046,079 67,037 1.4% 65,732 1.3% 132,769 1.4% Santa Clara 111,507 119,399 123,983 7,892 1.4% 4,584 0.8% 12,476 1.1% Saratoga 29,727 30,247 30,569 520 0.3% 322 0.2% 842 0.3% Sunnyvale 134,232 143,006 149,831 8,774 1.3% 6,825 0.9% 15,599 1.1%
Balance Of County 96,210 86,581 87,764 -9,629 -2.1% 1,183 0.3% -8,446 -0.9% Incorporated 1,628,856 1,741,915 1,850,416 113,059 1.4% 108,501 1.2% 221,560 1.3%
County Total 1,725,066 1,828,496 1,938,180 103,430 1.2% 109,684 1.2% 213,114 1.2%
Source: California Department of Finance; Economic & Planning Systems, Inc.
Economic & Planning Systems, Inc. 7 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Table 2 Santa Clara County Jobs-to-Working Residents Ratios
Jobs : Employed County / City Jobs Employed Residents Resident
Cupertino 41,934 26,486 1.58
Campbell 28,261 20,967 1.35 Gilroy 16,780 23,067 0.73 Los Altos 11,393 13,004 0.88 Los Altos Hills 2,032 3,325 0.61 Los Gatos 17,791 13,694 1.30 Milpitas 47,538 36,012 1.32 Monte Sereno 365 1,718 0.21 Morgan Hill 14,467 19,495 0.74 Mountain View 73,205 40,948 1.79 Palo Alto 111,968 30,223 3.70 San Jose 411,008 474,260 0.87 Santa Clara 111,954 61,257 1.83 Saratoga 7,529 12,979 0.58 Sunnyvale 90,730 73,514 1.23 Balance of County 19,913 36,468 0.55
Santa Clara County 1,006,868 887,417 1.13
Source: LEHD OnTheMap 2015; Economic & Planning Systems, Inc.
Economic & Planning Systems, Inc. 8 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Figure 2 Cupertino Employment Trend
41,000
39,000
37,000
35,000
33,000
Employment Employment 31,000
29,000
27,000
25,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: LEHD OnTheMap 2015; Economic &Planning Systems, Inc.
Table 3 Cupertino Commute Patterns
Employment Destinations for Cupertino Commute Origins for Cupertino Residents Employees Place Number Share Place Number Share
San Jose 4,902 19.6% San Jose 10,960 27.5% Cupertino 2,698 10.8% Sunnyvale 3,340 8.4% Sunnyvale 2,419 9.7% San Francisco 2,720 6.8% Santa Clara 2,329 9.3% Cupertino 2,698 6.8% Palo Alto 1,982 7.9% Santa Clara 2,398 6.0% Mountain View 1,525 6.1% Mountain View 1,247 3.1% San Francisco 1,081 4.3% Fremont 1,016 2.5% Fremont 778 3.1% Campbell 771 1.9% Milpitas 572 2.3% Palo Alto 649 1.6% Menlo Park 558 2.2% Milpitas 601 1.5% All Other Locations 6,198 24.8% All Other Locations 13,449 33.7%
Total 25,042 100% Total 39,849 100%
Source: LEHD OnTheMap 2015; Economic & Planning Systems, Inc.
Economic & Planning Systems, Inc. 9 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Figure 3 Employment Sector Trends in Santa Clara County
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Manufacturing Retail Trade Financial Activities Finance and Insurance Professional, Scientific and Technical Services Administrative and Support and Waste Services Educational Services Health Care and Social Assistance Leisure and Hospitality
Source: California Economic Development Department; Economic & Planning Systems, Inc.
Economic & Planning Systems, Inc. 10 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Table 4 Santa Clara County Employment Trends by Industry
2006-2011 2011-2016 2006-2016 Annual Annual Annual Industry 2006 2011 2016 Change Growth Change Growth Change Growth Rate Rate Rate
Construction 45,500 30,400 47,700 -15,100 -7.7% 17,300 9.4% 2,200 0.5% Manufacturing 159,500 154,500 162,300 -5,000 -0.6% 7,800 1.0% 2,800 0.2% Wholesale Trade 37,800 33,500 37,500 -4,300 -2.4% 4,000 2.3% -300 -0.1% Retail Trade 82,100 78,200 83,600 -3,900 -1.0% 5,400 1.3% 1,500 0.2% Transportation, Warehousing and Utilities 12,700 11,900 14,700 -800 -1.3% 2,800 4.3% 2,000 1.5% Financial Activities 36,600 32,000 35,300 -4,600 -2.7% 3,300 2.0% -1,300 -0.4% Finance and Insurance 21,500 19,000 21,500 -2,500 -2.4% 2,500 2.5% 0 0.0% Real Estate and Rental and Leasing 15,100 13,000 13,800 -2,100 -3.0% 800 1.2% -1,300 -0.9% Professional, Scientific and Technical Services 107,600 108,900 147,300 1,300 0.2% 38,400 6.2% 39,700 3.2% Management of Companies and Enterprises 10,000 8,800 13,000 -1,200 -2.5% 4,200 8.1% 3,000 2.7% Administrative and Support and Waste Services 52,100 47,700 63,200 -4,400 -1.7% 15,500 5.8% 11,100 2.0% Educational Services 31,300 37,000 46,000 5,700 3.4% 9,000 4.5% 14,700 3.9% Health Care and Social Assistance 78,800 91,000 114,900 12,200 2.9% 23,900 4.8% 36,100 3.8% Leisure and Hospitality 76,500 77,000 97,500 500 0.1% 20,500 4.8% 21,000 2.5% Other Services 25,300 24,200 27,000 -1,100 -0.9% 2,800 2.2% 1,700 0.7% Government 94,500 93,300 93,000 -1,200 -0.3% -300 -0.1% -1,500 -0.2%
Total, All Industries 886,900 860,400 1,018,300 -26,500 -0.6% 157,900 3.4% 131,400 1.4%
Source: California Department of Finance; Economic & Planning Systems, Inc.
Economic & Planning Systems, Inc. 11 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx
3. RETAIL REAL ESTATE MARKET CONDITIONS
The Silicon Valley region’s strong economic climate has positioned Cupertino as a highly attractive location for development for most land uses. Although the potential for retail development is more limited, largely due to national shopping trends, when excluding vacancies at Vallco the City’s retail real estate market appears healthy. Lease rates per square foot in the City are also significantly higher than that of the County’s, an indication of the desirability of the location. However, due to the Site’s location between various established regional retail centers, retail will likely need to be a component of a larger mixed-use development. In the last decade, the City has seen limited retail development deliveries with the exception of the Main Street project.
Market Trends
Cupertino has seen minor fluctuations in retail inventory over the last decade, aside from the 2016 delivery of Main Street Cupertino. The Main Street development, built by Sand Hill Property Company, consists of over 130,000 square feet of retail space across over a dozen buildings in an open-air, walkable, town center environment located adjacent to the Vallco Site. Retail at Main Street is nearly fully leased, with its opening marking a downturn in vacancy rates caused by the closing of Vallco’s anchors. The City’s retail lease rates have been on the rise since 2013 and currently stand at an average of $50 per square foot per year, well above the County average at above $30 per square foot, as seen in Figure 4. The high vacancy rates in 2015 and 2016 (see Figure 5) are largely attributable to the closing of Sears, Macy’s and J.C. Penney, with smaller Vallco Mall retailers following subsequently. When removing the effect of Vallco vacancy, the vacancy rate in the City is close to 2 percent. Santa Clara County has seen strong retail performance over the last decade, building approximately 6.7 million square feet with vacancy rates hovering around 5 percent and new inventory being consistently absorbed, as detailed in Figure 6.
Economic & Planning Systems, Inc. 12 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Figure 4 Average Retail Rental Rate per Square Foot in Cupertino and Santa Clara County
$60.00
$50.00
$40.00
$30.00
$20.00 Rent/Sq.Ft. (NNN)
$10.00
$0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Cupertino Santa Clara County 2018 YTD
Source: CoStar Group; Economic & Planning Systems
Figure 5 Retail Market Performance in Cupertino
200,000 35%
100,000 30%
0 25% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -100,000 Vacancy Rate 20% -200,000 15%
Square Feet Square Feet -300,000 10% -400,000
-500,000 5%
-600,000 0% Inventory Change Net Absorption SF Total Vacancy
Source: CoStar Group; Economic & Planning Systems
Economic & Planning Systems, Inc. 13 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Figure 6 Retail Market Performance in Santa Clara County
2,000,000 7%
6% 1,500,000
5% 1,000,000 Vacancy Rate
4%
500,000
3% Square Feet
0 2% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-500,000 2018 YTD 1%
-1,000,000 0% Inventory Change Net Absorption SF Total Vacancy
Source: CoStar Group; Economic & Planning Systems
Even with the closing of Vallco anchors and high retail vacancy, Cupertino’s taxable sales experienced just a modest dip of 1 percent in the period from 2014 to 2016, as seen in Figure 7. This dip is negligible when considering that the City experienced over 100 percent increase in taxable sales over the last decade. The City’s taxable sales, however, include business-to- business sales and have benefitted tremendously from Apple’s success.
Economic & Planning Systems, Inc. 14 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Figure 7 Taxable Retail Sales in Cupertino
$3,000,000,000
$2,500,000,000
$2,000,000,000
$1,500,000,000
$1,000,000,000
$500,000,000
$0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: CA Board of Equalization; Economic & Planning Systems
As is the case for retail throughout the country, the nature of new retail offerings has evolved from the traditional indoor mall and strip mall formats. In Silicon Valley alone, there are a number of recently renovated retail centers, including Westfield Valley Fair located in San Jose and the Stanford Shopping Center located in Palo Alto (see case study detail below), that have set the bar high for lifestyle shopping centers that have high profile retailers, amenities, and extensive restaurant offerings that are key traits of this new retail format. That isn’t to say that there isn’t successful retail being delivered outside modern formats. However, most other retail is stand-alone and site-specific, or catering to the value-oriented or convenience market.
Pipeline Projects
There is nearly 1.25 million square feet of retail currently under construction countywide with another 1.03 million proposed, as seen in Table 5. As for Cupertino, data from CoStar Group indicate that one retail project is currently in the pipeline, located west of Highway 85 on Stevens Creek Boulevard. While project tenanting has not yet been disclosed, it will consist of roughly 14,500 square feet of rentable retail space. In addition, a proposal for redevelopment of the Oaks Shopping Center might bring upwards of 50,000 square feet in retail space.
Economic & Planning Systems, Inc. 15 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Table 5 Santa Clara County Pipeline Retail Development3
Property Type Total Sq. Ft.
Proposed General Retail 344,060 Community Center 314,898 Neighborhood Center 133,258 Power Center 198,500 Strip Center 42,601 Sub-Total 1,033,317
Under Construction General Retail 367,797 Community Center 155,080 Lifestyle Center 216,855 Neighborhood Center 275,055 Power Center 214,091 Strip Center 19,360 Sub-Total 1,248,238
Total New Retail in Pipeline 2,281,555
Source: CoStar Group; Economic & Planning Systems, Inc.
Retail Conclusion
Adjusting for effects of Vallco on Citywide retail real estate performance metrics, it is evident that Cupertino’s retail market is performing well with low vacancy and healthy rental rates. However, the changing nature of retail must be accounted for when considering possible retail reuse of the Vallco Site. Research and observed trends suggest that retail-dominant centers must either fit into one of two extremes, luxury or value, with the middle market struggling to compete with online retailers. Retail reuse of the Site would require unique positioning that complements rather than competes with regional and local retailers or positions retail in a mixed-use development that may fulfill local demand while providing convenience to other on-site uses.
3 As of March 8, 2018, CoStar Group reports retail pipeline development that includes phase I of Related Santa Clara (a 240-acre mixed use development). The total proposed retail square footage in the project is 1.1 million square feet at buildout.
Economic & Planning Systems, Inc. 16 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Project Profiles
Westfield Valley Fair
Location 2855 Winchester Boulevard Year Built 1987 (renovated in 2002) Jurisdiction City of San Jose Rentable Building Area 1,415,765 Square Feet Year Built 1987 (renovated in 2002) Anchors Nordstrom, Macy's Vacancy 0%
Westfield Valley Fair is a super-regional mall located in the Winchester area of San Jose. The upscale, indoor, shopping mall is anchored by Nordstrom and Macy’s. Since the Mall was first constructed, it has undergone numerous renovations and remodels. The most recent renovation is a $1.1 billion ongoing project that will expand the Center’s footprint by roughly 650,000 square feet and add an outdoor dining area, a Bloomingdales department store, a luxury cinema, and other features to enhance the walkability and lifestyle orientation of the Center.4 The Mall is host to numerous retailers, restaurants, and service providers, while also providing additional services such as valet parking, phone charging stations, and family play areas.
4 Silicon Valley Business Journal, 6/30/2017
Economic & Planning Systems, Inc. 17 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Stanford Shopping Center
Location 500‐680 Stanford Shopping Center Year Built 1972 Jurisdiction City of Palo Alto Rentable Building Area 928,607 Square Feet Vacancy 0% Parking 1,910 Surface, 600 Covered Anchors Bloomingdales, Macy's, Neiman Marcus, Nordstrom
The Stanford Shopping Center is an open-air super-regional mall located near downtown Palo Alto on the campus of Stanford University. The upscale center is anchored by Bloomingdales, Macy’s, Neiman Marcus, and Nordstrom. The Mall recently underwent a two-year renovation that added 45 new stores along with place-making improvements such as floral planters and public fireplaces. The Center is home to numerous luxury retailers as well as alternative retail, including exercise studios, pop-up shops and varied dining options. The Center is owned and operated by Simon Property Group, an internationally recognized owner of high-end shopping and entertainment centers.
Economic & Planning Systems, Inc. 18 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Main Street Cupertino
Location 19419 Stevens Creek Boulevard Year Built 2016 Jurisdiction City of Cupertino Uses Retail , Office, Residential, Hotel Retail Sq. Ft. 133,000 Office Sq. Ft. 160,000 Apartment Units 120 (Under Construction) Stories 1‐story retail, 4‐5 stories for other uses Retail Vacancy 3% Retail Parking Spaces 350 Anchors Target
Main Street Cupertino is mixed-use development located near Interstate 280, adjacent to the Vallco Site. This development includes a town square, public park and open spaces, restaurant and retail offerings, 120 residential units, a 180-room hotel, and office spaces. The development marks the first phase of Sand Hill’s plans to develop the area into a mixed-use entertainment and retail district.
Economic & Planning Systems, Inc. 19 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Santana Row
Location 377 Santana Row, San Jose, CA Year Built 2002 (Phase I) ‐ Present Uses Residential, Retail, Dining, Entertainment, Hotel, Public Space Stories Above Ground 4 Retail Sq. Ft. 680,000 (55,640 planned) Residential Units 622 (1,182 planned) Type of Units Lofts, Townhomes, Villas, Flats Hotel Rooms 220 (404 planned) Office Sq. Ft. 65,000 existing, 284,000 under construction (zoning approved for an additional 226,000) Parking Spaces 4,182 FAR 0.7 Anchors Best Buy, Crate & Barrel This development includes a a six‐screen movie theater, multiple parks and public open spaces, and pedestrian amenities development on 18‐blocks with parking obscured from site.
Santana Row is located adjacent to Westfield Valley Fair in San Jose’s Winchester neighborhood. This mixed-use development includes 680,000 square feet of ground floor retail, 622 residential units, 214 hotel rooms, and 65,000 square feet of office. Santana Row also includes an entertainment component with a six-screen movie theater. There are plans to grow the site by adding an additional 1,182 residential units, 404 hotel rooms, and 700,000 square feet of office (284,000 square feet of office currently is under construction).
Economic & Planning Systems, Inc. 20 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Santa Clara Square
Location 2082 El Camino Real, Santa Clara, CA Year Built 2016 Uses Office, Dining, Retail, Residential Stories Above Ground Office (6/8), Retail (1), Apartment (4) Retail Sq. Ft. 120,000 Residential Units 2,000 Type of Units Apartments Office Sq. Ft. 1.7 million Parking Spaces Office (3,600) Anchors Whole Foods (50,000 sf)
Santa Clara Square, a mixed-use planned development located adjacent to Highway 101 in the City of Santa Clara, was delivered in 2016. The site’s 120,000 square foot retail component provides amenities for the 1.7 million square feet of office space and 2,000 residential units. The development is a horizontally mixed-use format with connectivity via pedestrian walkways. All offerings are highly amenitized with office spaces featuring floor-to-ceiling glass and indoor- outdoor working spaces and apartment communities featuring resort-style pools, spas and gyms as well as integrated social and co-working spaces.
Economic & Planning Systems, Inc. 21 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx
4. OFFICE REAL ESTATE MARKET CONDITIONS
Cupertino and the County have experienced very strong office performance as indicated by low vacancy rates. Even as the County delivered over 20 million square feet of office space in the last ten years, vacancy has decreased, indicating strong and lasting demand for office products. Despite speculation that the office market is overbuilt, trends suggest that the market has potential to grow. Roughly 22 million square feet of office space is currently in the County’s development pipeline.
Market Trends
Cupertino has seen minimal development of office properties over the last decade, which has resulted in consistently low vacancy rates of just 2 percent since 2015, as seen in Figure 8. Apple Campus II, completed in 2017, added 2.8 million square feet to Cupertino’s office inventory, accounting for over 30 percent of 2017 office development deliveries in Santa Clara County. Countywide, over 23 million square feet of office space has been delivered in the last decade, 36 percent of which was delivered since 2016 (see Figure 9).
While the County’s office stock grew by 23 million square feet, vacancy rates fell from 2009 highs of 17 percent to current rates of roughly 10 percent. These data indicate high demand for office space throughout the region. In 2016, lease rates reached over $45 per square foot in Cupertino, slightly above the County’s average of about $42 per square foot, as seen in Figure 10.
Despite some speculation that the strong Silicon Valley office market is overbuilt, given the significant new inventory and nature of economic cycles, recently observed trends and continued building suggests market confidence. A primary concern is the mismatch between housing growth and job growth, with costly and undersupplied housing posing a threat to the continued expansion of high-tech sectors in the South Bay. However, net office absorption increased last year relative to the previous year, even while the Silicon Valley market ended its seventh consecutive year of positive net absorption.5 Investor demand continues to remain strong for office product that is well-designed, strategically located, and has a long-term tenant in place. Real estate professionals do expect office rents to flatten in 2018 as a result of the significant increase in supply, especially with the delivery of developer-led speculative space.6
5 Why Silicon Valley Isn’t headed for a recession any time soon, Economist Predicts, Janice Bitters, Silicon Valley Business Journal, 2/14/2018
6 Cushman and Wakefield, Silicon Valley Office Q4 2017
Economic & Planning Systems, Inc. 22 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Figure 8 Office Lease Rates in Cupertino and Santa Clara County
$50.00
$45.00
$40.00
$35.00 Service)
$30.00
$25.00
$20.00 (Annual, Full
$15.00 Sq.Ft.
/ $10.00
Rent $5.00
$0.00 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Cupertino Santa Clara County 2018 YTD
Source: CoStar Group; Economic & Planning Systems
Economic & Planning Systems, Inc. 23 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Figure 9 Office Market Performance in Cupertino
3,000,000 20%
18% 2,500,000 16% 2,000,000 14% 1,500,000 Vacancy 12% Feet
1,000,000 10%
Rate Square 8% 500,000 6% 0 4%
-500,000 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2%
-1,000,000 0%
Inventory Change Net Absorption SF Total Vacancy
Source: CoStar Group; Economic & Planning Systems
Figure 10 Office Market Performance in Santa Clara County
10,000,000 25%
8,000,000 20%
6,000,000
15% Vacancy Feet 4,000,000
Rate 10% Square 2,000,000
5% 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-2,000,000 0% 2018 YTD Inventory Change Net Absorption SF Total Vacancy
Source: CoStar Group; Economic & Planning Systems
Economic & Planning Systems, Inc. 24 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Pipeline Projects
There continues to be significant office projects in the pipeline for Santa Clara County. Roughly 5.6 million square feet of office space is currently under construction in Santa Clara County with another 16.7 million square feet proposed, as detailed further in Table 6. Cupertino, however, has no major office projects currently planned or under development.
Table 6 Santa Clara County Pipeline Office Development
Rentable Building Address / Item Building Park / Name City Building Area
Proposed Largest Building Parks 1100 Campus Way North First Campus San Jose 1,824,500 2890 N 1st St The Station on North First San Jose 1,756,200 N Shoreline Blvd Google Mountain View 1,600,000 Coleman Ave Coleman Highline San Jose 1,178,459 Wright Ave NASA Ames Research Center Moffett Field 1,100,000 Other Office Developments N/A 9,296,145 Total Office Sq.Ft. Proposed 16,755,304
Under Construction Largest Building Parks 1190 Discovery Way Moffett Towers II Sunnyvale 1,752,652 222 N Wolfe Rd Central & Wolfe Sunnyvale 777,170 1152 Bordeaux Dr Moffett Place Sunnyvale 630,544 900 Santana Row Santana Row San Jose 545,840 N 1st St Midpoint@238 San Jose 415,000 Other Office Developments N/A 1,487,907 Total Office Sq.Ft. Under Construction 5,609,113
Total Office Sq.Ft. in Pipeline 22,364,417
Sources: CoStar Group; Economic & Planning Systems, Inc. Office Conclusion
Cupertino has added very little new office inventory in the last decade, which is surprising when considering that office inventory in Santa Clara County grew by 23 million square feet over the same period. Given the strong business climate in the Silicon Valley and the strong observed market conditions for office real estate in Cupertino and the greater region, the Vallco Site is well positioned for office development. The Site is especially attractive given its convenient freeway access and central location in Silicon Valley.
Economic & Planning Systems, Inc. 25 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Project Profiles
Sutter Health
Economic & Planning Systems, Inc. 26 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Apple (Building A)
Location 5409 Stevens Creek Blvd, Santa Clara Year Built 2014 Uses Class A Office Stories Above Ground 6 Building Sq.Ft. 187,500 Land Acreage 2.54 Parking Format 640 Subterranean, 19 Surface Parking Spaces 659 Parking Ratio per 1,000 Sq.Ft. 3.30 Average Lease Rates (per Sq.Ft.) Owner Occupied Occupancy Rate 100%
Economic & Planning Systems, Inc. 27 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Main Street Cupertino
Economic & Planning Systems, Inc. 28 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx
5. RESIDENTIAL REAL ESTATE MARKET CONDITIONS
While Cupertino has seen little multifamily development over the last decade, rental rates and performance metrics suggest a healthy market. The 2014 delivery of Nineteen800 and the development of the Lofts at Main Street reveal potential for mixed-use residential development. Additionally, the statewide housing crisis has magnified effects on Silicon Valley’s housing market due to the influx of jobs and investment without a commensurate increase in housing supply, leading to lengthy commutes and a constrained talent supply for local businesses. Most of the region’s new multifamily housing supply caters to the upscale market. Real estate professionals predict that multifamily demand will remain strong as the region remains under-supplied and job growth remains positive.7
Residential Permitting
The issuance of single-family residential building permits in the City of Cupertino has been relatively steady over the last decade, with annual permits for units in single-family structures ranging from 20 to 80 permits per year. While historically Cupertino has not delivered many multifamily units, there was an uptick in 2013 that marked the first multifamily building permitting in five years, as seen in Figure 11.
Cupertino appears to be building relatively less residential units than its neighbors. In Santa Clara County, residential building permits increased sharply after the 2008 recession, with multifamily building permits increasing by nearly 90 percent over 2009 lows, as seen in Figure 12. Over ten years, the total building permits issued in Cupertino (roughly 870) account for just over 1 percent of the County total. Cupertino has issued 66 percent single-family permits, as compared to the County’s 28 percent. Figure 13 illustrates building permit trends in selected Cities proximate to Cupertino. Despite the relatively low level of housing production in Cupertino, it is likely that these data reveal City policy and planning for housing, more so than market demand.
7 Will 2018 Be another Good Year for Multifamily, Julie Littman, Bisnow Bay Area, 1/3/2018
Economic & Planning Systems, Inc. 29 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Figure 11 Residential Building Permits in Cupertino 140
120 Year
Per 100 Issued 80 Permits
60
40 Building
20
Number of 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Permits for Units in Single Family Structures Permits for Units in Multifamily Structures
Source: State of the Cities Data System Building Permits Database (HUD USER); Economic & Planning Systems, Inc.
Figure 12 Residential Building Permits in Santa Clara County 9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
NumberPer Year Issued of Building Permits 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Permits for Units in Single Family Structures Permits for Units in Multifamily Structures
Source: State of the Cities Data System Building Permits Database (HUD USER); Economic & Planning Systems, Inc.
Economic & Planning Systems, Inc. 30 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Figure 13 Total Residential Building Permits in Selected Jurisdictions
1,000
900
800
700
600
500
400
300
200
100 Number of Building Permits Issued Per Year Issued Per of Building Permits Number 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Cupertino Campbell Mountain View Palo Alto Sunnyvale
Source: State of the Cities Data System Building Permits Database (HUD USER); Economic & Planning Systems, Inc.
Market Trends
Multifamily Rental Product
Delivery of new inventory has been modest and residential demand has put upward pressure on rental rates, with average monthly rent per square foot currently at $3.08, an increase of roughly 40 percent since recessionary lows of 2009, as shown in Figure 14. New product rents for roughly $3.50 to $3.80 per square foot. Rental rates in Cupertino have remained roughly 10 percent above the Santa Clara County average, although, the County has seen much greater development over the same period. While Cupertino added just 204 rental units since 2008, Santa Clara County has delivered about 27,600 units while exhibiting relatively consistent vacancy rates hovering around 5 percent, as seen in Figures 15 and 16.
Economic & Planning Systems, Inc. 31 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Figure 14 Average Multifamily Rental Rate per Square Foot in Cupertino and Santa Clara County
$3.50
$3.00
$2.50
$2.00
$1.50 Rent / Sq.Ft.
$1.00
$0.50
$0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD Cupertino Santa Clara County
Source: CoStar Group; Economic & Planning Systems, Inc.
Figure 15 Multifamily Market Performance in Cupertino
250 8%
200 7%
150 6% 100 5% Vacancy Rate 50 4% 0
Square Feet 3%
-50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2% -100
-150 1%
-200 0% Inventory Change Net Absorption Units Vacancy
Source: CoStar Group; Economic & Planning Systems, Inc.
Economic & Planning Systems, Inc. 32 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Figure 16 Multifamily Market Performance in Santa Clara County
7,000 8%
6,000 7%
5,000 6%
4,000 5% Vacancy 3,000 Feet
4%
2,000 Rate
Square 3% 1,000
2% 0
-1,000 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1%
-2,000 0% Inventory Change Net Absorption Units Vacancy
Source: CoStar Group; Economic & Planning Systems, Inc.
Multifamily For-Sale Market
Cupertino has a number of condominium developments, including within mixed-use projects and in traditional residential communities. Condominium units have an average valuation of nearly $1.2 million as of 2017, which marks a 120 percent increase since 2012, as seen in Figure 17. The existing condominium units in the City are all relatively low-density, with no projects identified over four stories.
Economic & Planning Systems, Inc. 33 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Figure 17 Value of Condominium (For-Sale) Units in Cupertino
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
$0 01 08 03 10 05 12 07 02 09 04 11 06 01 08 03 10 05 12 07 02 09 04 11 06 01 08 03 10 05 12 07 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 2000 2000 2001 2001 2002 2002 2003 2004 2004 2005 2005 2006 2007 2007 2008 2008 2009 2009 2010 2011 2011 2012 2012 2013 2014 2014 2015 2015 2016 2016 2017
Source: Zillow Data; Economic & Planning Systems, Inc.
Pipeline Projects
Cupertino has two multifamily projects under construction and another two proposed, while Santa Clara County has 9,900 units under construction and another 17,700 units proposed, as seen in Table 7. The residential portion of Main Street Cupertino, which is currently under construction, will add roughly 120 units. Additionally, a multifamily development located at 10121 N Foothill Blvd is nearing completion, which will add another 15 units to the City’s housing stock. Two projects proposed for Cupertino, the Hamptons and Marina Plaza, are part of larger mixed-use developments and could potentially add a cumulative 1,130 units by 2020, if approved and constructed.
Economic & Planning Systems, Inc. 34 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Table 7 Santa Clara County Pipeline Multifamily Development
Rentable # of # Of Building Status Building Projects Units Area
Campbell Under Construction 2 135 115,400 Cupertino Proposed 2 1,130 1,047,800 Under Construction 2 135 120,504 Gilroy Under Construction 2 100 245,000 Milpitas Proposed 3 1,633 1,529,200 Under Construction 4 1,815 1,989,390 Morgan Hill Proposed 1 61 70,000 Under Construction 13 228 672,113 Mountain View Proposed 9 2,715 3,048,330 Under Construction 6 1,651 1,624,981 Palo Alto Proposed 2 64 91,600 San Jose Proposed 35 8,519 7,819,019 Under Construction 16 3,128 2,908,889 Santa Clara Proposed 9 2,434 2,206,801 Under Construction 2 2,476 1,894,000 Sunnyvale Proposed 6 1,152 1,557,211 Under Construction 3 198 406,310
TOTAL Proposed 67 17,708 17,369,961 TOTAL Under Construction 50 9,866 9,976,587
TOTAL Pipeline 117 27,574 27,346,548
Source: CoStar Group; Economic & Planning Systems, Inc. Residential Conclusion
While Cupertino has historically offered primarily low-density housing product, the recent completion of Apple Campus II and the ongoing economic activity in Silicon Valley have intensified the need for housing at a local and regional scale. In the last decade, Cupertino has added just 200 units in multifamily rental projects, even while experiencing high rental rates and consistently low vacancy. Observed multifamily performance trends in the City and County suggest that the Vallco Site could successfully accommodate residential uses and support denser housing formats than are currently offered in the City.
Economic & Planning Systems, Inc. 35 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Project Profiles
Nineteen800
Location 19800 Vallco Pkwy, Cupertino Year Built 2014 Uses 47,228 square feet of ground floor retail/ residential above Stories Above Ground 6 Building Sq.Ft. n/a Land Acreage n/a Units 204 Average Unit Size (Sq.Ft.) 1,356 Parking Format surface/ subterranean Parking Spaces* 896 Parking Ratio per Unit 4.39 Average Lease Rates (per Sq.Ft.) $3.59 Occupancy Rate 96.1% Sale Price/ Date n/a Amenities available to residents include a theater, a conference room, a yoga room, game room, fitness room, shared kitchen & dining facilities as well as an outdoor playground, fire pit, dog‐washing area, and multiple barbeques.
*Includes parking for commercial uses
Economic & Planning Systems, Inc. 36 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Main Street Cupertino Lofts
Location 19550 Vallco Pkway, Cupertino Year Built 2018 Uses 10,000 sq.ft. of retail/ residential Stories Above Ground 4 Building Sq.Ft. 100,000 Land Acreage 1.60 Units 120 Average Unit Size (Sq.Ft.) 1,031 Parking Format 2 levels of subterranean The project is organized around a central courtyard which includes a BBQ area and outdoor movie theater.
Economic & Planning Systems, Inc. 37 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Sunnyvale Loft House Apartments
Location 150 S Taaffe St, Sunnyvale Year Built 2014 Uses 6,891 sq.ft. of ground floor retail/ residential above Stories Above Ground 5 Building Sq.Ft. 146,000 Land Acreage 1.59 Units 133 Average Unit Size (Sq.Ft.) 924 Parking Format 2 levels of subterranean parking Parking Spaces 235 Parking Ratio per Unit 1.77 Average Lease Rates (per Sq.Ft.) $4.18 Occupancy Rate 94% Sale Price/ Date $104,000,000/ June 17, 2017 The property includes a sundeck with a poolside bar, social Lounge with fireside retreat, complimentary Wi‐Fi, business center, modern fitness center, car charging station, pub‐ style billiards room, resident bike storage, and outdoor grill/dining area.
Economic & Planning Systems, Inc. 38 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Oakwood
Location 881 E El Camino Real, Mountain View Year Built 2015 Uses residential Stories Above Ground 4 Building Sq.Ft. 130,000 Land Acreage 2.31 Units 149 Average Unit Size (Sq.Ft.) 868 Parking Format Subterranean Parking Spaces 153 Parking Ratio per Unit 1.03 Average Lease Rates (per Sq.Ft.) n/a Occupancy Rate n/a Sale Price/ Date $110,000,000/ December 9, 2015 This property includes a business center, fitness center, conference room, central court yard, pool/jacuzzi, pet play area, and bike storage.
Economic & Planning Systems, Inc. 39 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx
6. HOTEL MARKET CONDITIONS
Over the last couple years, Silicon Valley has experienced strong demand for visitor accommodations, generated primarily by the strong and growing regional economy. As of 2017, Silicon Valley8 had a hotel inventory of roughly 46,800 rooms across 420 properties.9 The market experienced year-over-year RevPAR (revenue per available room) growth in the period from 2010 to 2016, with just minor slow-downs in occupancy and daily room rates over those years, mostly attributable to new supply. 10 As of early 2017, Silicon Valley hotel occupancy stood at 78 percent with average daily rates at roughly $203 and RevPAR at $158.11
With demand for accommodations in this market primarily driven by business travel, many operators reported being fully booked on Tuesdays and Wednesdays with average annual occupancy rates at over 91 percent on Tuesdays and Wednesdays.12 Furthermore, hotel demand appears fairly consistent year-round, February to October, with some declines over the Holiday months.
The City of Cupertino has six existing hotels, as depicted in Figure 18, with one hotel currently under construction and located on the Project Site. These six hotels supply the City with roughly 970 rooms and range in scale from Upscale to Upper Upscale, as defined by Smith Travel Research, seen in Table 8. Furthermore, the City’s existing hotels have experienced remarkable performance over the last year with average occupancy rates over 80 percent and room rates averaging $223 per night, as seen in Table 9. These data suggest that the City could absorb more demand, though there are two hotels in the City’s development pipeline. In the long-run, the addition of more accommodation options likely will be supported by the local and regional market at the Vallco Site.
Hotel Conclusion
Cupertino’s hotel market has seen markedly high occupancy rates and strong room rates in recent years. The City’s hotels primarily cater to business travelers and demand remains fairly consistent year-round. There are likely additional opportunities for well-positioned hotels to satisfy future visitor needs over the longer term.
8 Silicon Valley defined here as southern portion of San Francisco Bay, including San Mateo County, Santa Clara County and portions of Alameda County.
9 HVS Market Pulse: Silicon Valley
10 HVS Market Pulse: Silicon Valley
11 Development demand has Silicon Valley hotels trending, Bryan Wroten, Hotel News Now, 4/6/2017
12 Smith Travel Research average for Silicon Valley Hotels in 2017, excluding economy and midscale offerings.
Economic & Planning Systems, Inc. 40 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Figure 18 Cupertino Hotels
Table 8 Hotel Inventory in Cupertino
Hotel Address Chain Scale1 Rooms
Existing Cupertino Inn (Cupertino Hotel) 10889 N. De Anza Blvd. Upper Upscale 128 Hilton Garden Inn 10741 N. Wolfe Rd. Upscale 164 Marriott Courtyard 10605 N. Wolfe Rd. Upscale 149 Juniper Hotel by Curio 10050 S. De Anza Blvd. Upper Upscale 224 Aloft Cupertuno Hotel 10165 N. De Anza Blvd. Upscale 123 Residence Inn by Marriott 19429 Stevens Creek Blvd. Upscale 180 Total 968
Under Construction Hyatt House 10380 Perimeter Road (Vallco Park) Upscale 148
Total, All Hotels 1,116
1STR Categorization
Source: Westport Cupertino Hotel Proposal, 2017; Economic & Planning Systems, Inc.
Economic & Planning Systems, Inc. 41 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Table 9 Cupertino Hotel Performance (2017)
Occupancy Avg. Rate Meeting Hotel Chain Scale1 Estimate2 Estimate2 Space (SF)2
Existing Cupertino Inn (Cupertino Hotel) Upper Upscale 81% $200 1,720 Hilton Garden Inn Upscale 83% $210 1,650 Marriott Courtyard Upscale 82% $215 1,248 Juniper Hotel by Curio Upper Upscale 80% $260 4,897 Aloft Cupertuno Hotel Upscale 80% $230 1,101 Residence Inn by Marriott Upscale - - 4,138 Total/Average 81% $223 2,459
1STR Categorization 2Market Study and Product Recommendation, Proposed Westport Cupertino Hotel, Hospitality Link International, Inc; Economic & Planning Systems, Inc.
Source: Westport Cupertino Hotel Proposal, 2017; Economic & Planning Systems, Inc.
Economic & Planning Systems, Inc. 42 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Project Profiles
Residence Inn
Location 19429 Stevens Creek Blvd, Cupertino, CA 95014 Year Built 2017 Number of Rooms 180 Hotel Type / Class Extended Stay
Amenities kitchenettes, fitness center, meeting space
The Residence Inn, opened in October 2017, is located within the Main Street Cupertino development. This new extended stay hotel includes 180 guest rooms featuring kitchenettes with limited cooking equipment, an on-site fitness center, and over 4,000 square feet of meeting space. The hotel offers studio, one-bedroom, and two-bedroom suites that are designed for extended stays of five-nights or more.13 This hotel is primarily marketed towards employees relocating to the area for a limited time or seeking interim accommodations as they find more permanent housing, and thus, is uniquely positioned amongst the other Cupertino hotel offerings.
13 Residence Inn Hotel Opened in Cupertino, Travel Daily News, October 27, 2017
Economic & Planning Systems, Inc. 43 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx Vallco Special Area Real Estate Market Assessment Report 05/14/18
Aloft Cupertino
Location 10165 N De Anza Blvd, Cupertino, CA 95014 Year Built 2013 Number of Rooms 123 Hotel Type / Class Upscale Amenities ocus, meeting spcae, fitness cener, restaurant and bar Average Occupancy 80% Average Room Rate 230
Aloft Cupertino, a 123-room hotel, was well-received upon opening in 2013 due to its unique technology-focused positioning. The hotel features robotic butlers that act as a guest concierge, delivering extra towels to guestrooms or assisting hotel employees with tasks in the back of house. Additionally, the hotel offers amenities like apple-TVs in every room, keyless door entry, 1,100 square feet of meeting space, an on-site gym, live-music at their branded W XYZ bar and an on-site café. The hotel has seen consistently strong performance metrics with estimated occupancy of roughly 80 percent and average daily room rates of about $230 in 2016.14
14 Market Study and Product Recommendation, Proposed Westport Cupertino Hotel, Hospitality Link International, Inc; Economic & Planning Systems, Inc.
Economic & Planning Systems, Inc. 44 P:\171000s\171128_VallcoSP\Deliverables\Market\171128 VSA PMA REPORT.docx